Service Tax on Insurance Premium

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

26 June 2011 The service tax on Insurance Premium is charged @ 10.3%. How ever in case of motor insurance no claim Bonus is given and in case of group insurance, a portion of premium is refunded by way of adjustment against future Premium. In case of Group schemes the premium is paid by the trust set up by Companies. Thus If the premium under motor insurance is Rs. 10,000, no claim Bonus is Rs. 4000 & net premium is Rs. 6000. Whether service tax is payable on gross premium of Rs. 10,000/- or Rs. 6000.. Similarly, in respect of Group Insurance Scheme covering employees of a Company through a separate irrevocable trust set up by the Company, the premium is charged on quarterly basis and adjustment of profit sharing is also done quarterly. Thus premium for first quarter is Rs. 10 Lakhs, which is paid through irrevocable trust set up by the Company for the welfare of the Employees of the Company. The service tax in the first quarter is on premium of Rs. 10 lakhs. How ever, in the second quarter, due to low no. of claims a portion of premium is refunded by way of adjustment against premium for second quarter. Thus the premium due in second quarter is also Rs. 10 Lakhs. But 4 Lakhs of premium pertaining to first quarter is adjusted/ refunded by way of adjustment against premium due in second quarter. The actual amount of premium paid in second quarter is only Rs. 6 Lakhs. Thus against a premium of 40 lakhs in one full year, the Trust is payng Rs. 28 Lakhs of premium. Whether service tax is payable on Rs. 40 Lakhs or Rs. 28 Lakhs. Under what section of the service tax rules, we have to charge service tax on premium, where there is future adjustment of premium due to favourable claim experience. Whether any clarification from the Ministry are available.

My Company has a group insurance contract through the trust set up by our Company with an Insurer for the coverage of all our Employees. The Insurance Premium is charged with the condition, that if the claims are less than premium paid by us, then the balance amount after deduction of administrative expenses to the tune of 6.5 of the premium is refunded by way of adjustment against the future premium for the renewal of the Insurance Scheme. The premium paid by our Company is on quarterly basis and the premium for the next quarter is Gross premium less by the profit shared by way of refund of the premium. The insurance Company is passing on the service tax paid by them to us. Thus for the full year as per rules the gross premium amount comes for our Company to about Rs. 40 Lakhs, but due to profit sharing we pay only Rs. 28 Lakhs of premium. How ever the Insurer is charging service tax on the gross amount of premium i.e Rs. 40 Lakhs @ 10.3%. Thus we have to pay Rs. 4.12 lakhs as service tax. How ever in our Books, the total premium paid by us is only Rs. 28 Lakhs. Our auditors have pointed out that there is an excess payment of Rs. 1.23 Lakhs. Our Insurer is insisting that as per rules they have to pay the service tax on the Insurance Premium which they show in their Books as Rs. 40 Lakhs and Rs. 12 Lakhs are shown as profit shared due to favourable claims ratio. Further some of the Employees of our Comapny resign and their insurance cover is stopped by us for balane no. of months. The insurer refunds the premium for that Employee on proportionate basis. How ever service tax is not refunded or adjusted for that amount against addition of any new Employee whose premium is accepted by the Insurance Company. Thus we are forced to pay more service tax than 10.3%. Please help and confirm what are the exact rules in thsi regard. Thanks.

U S Sharma

U S Sharma (Expert)
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26 June 2011 NCB is a kind of "reimbursement" towards the premiums payable, so the premiums are full and service tax charged is full as per contract, however your net outgo is less than the actuals, due to NCB, on the reimbursement portion you have to pay service tax.

Querist : Anonymous

Querist : Anonymous (Querist)

27 June 2011 Sir, the problem is that for motor insurance vehicles or any other type of general insurance or insurance of our machinery and plants the service tax is charged on the net premium by the General Insurance Company. Thus if premium for motor vehicle insurance is Rs 10000/-, Rs 4000 is the no claim Bonus, the net premium paid on renewal is only Rs 6000/- The Insurance Co. is charging service tax on net premium i.e. Rs 6000 only. Sir, you can see any motor vehicle insurance receipt for confirmation.
How ever in case of the life insurance of the Employees of our Company done through the irrevocable trust set up by us, the life insurance Co. is charging service tax on gross premium, even though premium paid by us is far less due to adjustment of profit sharing..

Sir. the point is why this anomaly. Only one of the Insurer must be right. Or is it because premium is paid through trust? Please guide. Thanks